Dealer Bank
What Is a Dealer Bank?
A dealer bank is a commercial bank that is authorized to buy and sell government debt securities. Instances of such securities incorporate federal and municipal bonds, which are utilized to fund different public drives, for example, infrastructure spending and general government expenditures.
Dealer banks in the U.S. are required to register with the Municipal Securities Rulemaking Board (MSRB), a self-regulatory organization that operates under oversight by the U.S. Securities and Exchange Commission (SEC). Numerous different countries likewise use a primary dealer system to buy government bonds from their separate central banks.
How Dealer Banks Work
Dealer banks play an important job in the capital markets since they help to work with the government's fundraising activities. To raise funds by giving a municipal bond, they could sell that bond to a network of dealer banks who might then, thusly, resell those securities to the investing public. The dealer bank's customers could go in size from large [institutional investors](/institutionalinvestor, for example, pension funds and other financial firms, to individual retail investors.
Dealer banks earn their profit by increasing the resale price of the government securities that they purchase. Then again, they likewise expect the risk of not having the option to sell those securities at a profitable price. In this sense, they act as a sort of reseller of the government's debt securities, overcoming any barrier between the government and the investing public.
Simultaneously, dealer banks are likewise participated in traditional banking activities like taking customers' deposits and lending out money to companies and individuals. This means they appreciate other revenue streams, for example, the interest income earned on mortgages, lines of credit, and credit cards.
Special Considerations
The term "dealer bank" can likewise be utilized in a more broad sense to allude to banks that sell securities from their own portfolio (frequently for clients), whether or not those securities were purchased from a government agency. These are some of the time known as broker-dealers (BDs).
For instance, some dealer banks buy and sell collateralized debt obligations (CDOs) and other derivative products. These types of securities generally carry a lot higher risks than government debt instruments, and frequently have moderately couple of customers.
This can make it challenging to price these securities, incidentally leading to critical losses precisely.
During the 2007-2008 financial crisis, numerous dealer banks experienced critical losses due to sudden declines in the value of CDOs linked to the then-plunging real estate sector.
Primary Dealers
Notable instances of dealer banks incorporate J.P. Morgan Securities LLC (JPM), Bank of America Securities, Inc. (BAC), and Wells Fargo Securities, LLC. (WFC). Notwithstanding their customary commercial banking operations, these banks all buy and sell government securities, for example, the bonds issued by state and municipal governments.
Likewise, these banks are additionally part of an elite group of approximately two-dozen institutions that are authorized to buy U.S. government debt straightforwardly from the Federal Reserve. This group, all in all known as "primary dealers," plays a sort of wholesaling job for U.S. government debt all through the world. Due to the centrality of the U.S. dollar (USD) in the world economy, these prime dealers are important institutions in the global banking system.
A primary dealer needs to support least capital requirements going from $50 million for non-banks to $1 billion of Tier 1 capital for banks. Broker-dealers applying for a spot in the primary dealer system must register with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA).
The Fed gathers data from the primary dealers and spreads reports for the public, recording the amount of federal debt issuance.
Features
- Dealer banks likewise participate in commercial banking activities like giving loans and gathering deposits.
- Broker-Dealers (BDs) are a type of dealer bank that likewise takes care of requests for customers.
- A dealer bank is a type of bank that buys and sells securities.
- Certain dealer banks, known as "primary dealers", are exceptionally authorized to purchase U.S. government debt instruments straightforwardly from the Federal Reserve.
- Primary dealers likewise operate to disperse sovereign debt from their separate central banks in different countries.
FAQ
What Is the Difference Between a Broker and a Dealer?
As a rule, a broker acts for a client as a agent to work with a buy or sell order with an interested seller or buyer, by and large. A dealer, then again, trades with customers securities from their own account, where they act as principal.
What Is a Broker-Dealer?
A broker-dealer (BD) is a financial firm that trades securities from its own account for its own proprietary trading or in the interest of its clients. A broker-dealer can in this manner act as both principal and agent on a trade, contingent upon the conditions.
How Do Primary Dealers Make Money?
Primary dealers purchase government debt straightforwardly to resell those bonds to investors at a slight increase, which is the way they earn a profit.
What Is a Dealer Account?
A dealer account alludes to the portfolio or holdings of a dealer bank. For primary dealers, this may likewise incorporate an account laid out at the central bank to purchase Treasuries.
